Is Augros Cosmetic Packaging (EPA:AUGR) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Augros Cosmetic Packaging SA (EPA:AUGR) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Augros Cosmetic Packaging

How Much Debt Does Augros Cosmetic Packaging Carry?

As you can see below, at the end of June 2020, Augros Cosmetic Packaging had €3.56m of debt, up from €2.02m a year ago. Click the image for more detail. However, it does have €888.2k in cash offsetting this, leading to net debt of about €2.67m.

How Strong Is Augros Cosmetic Packaging's Balance Sheet?

The latest balance sheet data shows that Augros Cosmetic Packaging had liabilities of €8.02m due within a year, and liabilities of €1.05m falling due after that. Offsetting these obligations, it had cash of €888.2k as well as receivables valued at €3.63m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.55m.

This deficit is considerable relative to its market capitalization of €7.05m, so it does suggest shareholders should keep an eye on Augros Cosmetic Packaging's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Augros Cosmetic Packaging's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Augros Cosmetic Packaging made a loss at the EBIT level, and saw its revenue drop to €16m, which is a fall of 8.5%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Augros Cosmetic Packaging produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €516k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €1.3m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Augros Cosmetic Packaging that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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